The many thoughts about the Bailout proposed by Secretary of the Treasury Henry Paulson permeate the blawgosphere. But one that may not have received sufficient mention is that this isn’t the first time our country has rushed blindly into an emergency situation with a law under the guise that “something has to be done immediately.”
On October 26, 2001, President George W. Bush signed into law the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,” better known by its acronym, the USA Patriot Act.
This law, coming on the heels of 9/11 at a time when there was no law that could be too tough or restrictive if it served to protect Americans from terrorism, was an amalgamation of the failed wishlist of Justice Department initiatives. Suddenly, the rejected became the desperately needed. And no one wanted to be held accountable for leaving the nation open to a terrorist attack.
They didn’t know that the law said. No one had bothered to read it. No one had time. It was an emergency. We had to act. NOW! We had to protect America. We just had to.
Some think the USA Patriot Act didn’t turn out nearly as well as Congress hoped. Yet once we jumped off the cliff, eyes closed but heart full of promise, there was no going back.
The economy presents a big problem, commanding attention. Pat Paulson was tasked to come up with a plan to get us out of this very large ditch. Some are questioning the plan, particularly the $700 billion blank check that Paulson would hand to himself with no strings attached. I can’t tell you how relieved I am that somebody read this law before passing it.
But even as the ubiquitous Barney Frank talks about various tweaks, it’s still Paulson’s plan. He created the paradigm, and there’s no time for anyone else to craft a competing plan. While pundits pick at the edges, the essentials remain intact. Being no economist, I’ve got no clue whether Paulson’s plan will save the day. But others, more macroeconomically incline than me, should consider whether the concept is, at its heart, sound before jumping on the bandwagon to approve another hastily created plan to address another “sky is falling” emergency. Just take a few days to think about it, as should have happened before the USA Patriot Act was passed.
Jonathon Adler at VC notes that George Will, one of the few surviving conservative dinosaurs, is none too pleased with Senator McCain’s talking points.
McCain’s smear — that [Chris] Cox [SEC Chairman] “betrayed the public’s trust” — is a harbinger of a McCain presidency. For McCain, politics is always operatic, pitting people who agree with him against those who are “corrupt” or “betray the public’s trust,” two categories that seem to be exhaustive — there are no other people.
One of the easiest ways to address emergencies is to find a fall guy and burn him. It’s a tried and true means of quieting the maddening crowd. While the population is afraid, a villain provides a target for their anger and deflects attention from deeper, more complex causes.
Today, people still believe that we invaded Iraq because of its role in 9/11. Once a myth is firmly established, it can be very hard to convince people that it was only a myth. Is our bailout plan premised upon myth?
George Will, incidentally, reaches an interesting conclusion about Senator McCain:
It is arguable that, because of his inexperience, Obama is not ready for the presidency. It is arguable that McCain, because of his boiling moralism and bottomless reservoir of certitudes, is not suited to the presidency. Unreadiness can be corrected, although perhaps at great cost, by experience. Can a dismaying temperament be fixed?
It’s a Hobson’s choice. But as Winston Churchill told the ugly woman, “tomorrow I’ll be sober.”
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Pat Paulson? There are times when I think the folks in DC are not very good (albeit well-intentioned) comedians (and that’s why I’m voting against Al Franken; no need to add to the comedian list), but . . .
122 economists agree, there’s no need to rush.
Heheheh. I slipped that one in.
Wasn’t sure; thought it might be a mindo. (Not that I’m one to criticize; there’s the book I wrote where a horse changes from a gelding to a mare and back to a gelding in three pages, and not by dint of magic or amazing surgery, either.)
On a more serious note: as several folks who know a lot more about this than I do have argued, the bailout, as expensive as it’s going to be, is chump change compared to a crash, and there’s at least some reason to think that we came very, very close to a crash; see http://meganmcardle.theatlantic.com/archives/2008/09/how_close_was_the_financial_sy.php .
From this remove, what appeared to suspend that real possibility was the Fed, and the feds, at least saying that they were going to something Great Big and Ugly but Necessary. I’m guessing that the suspension of doomsday should last through the weekend, sure, but as the folks over at Volokh have pointed out, at least some of the people (*cough* Dodd *cough*) who are complaining about the thing giving too much power to the Treasury are apparently in favor of solving that by giving the Treasury more power.
Huh?
(I’m not even sure that all of Dodd’s ideas are wrong, mind you. I think one of the problems that it might solve is the one that NPR keeps pointing to: there’s simply nobody that a mortgage owner in trouble can negotiate with, as the ownership of the troubled mortgages is sliced and diced too finely to make that possible. While the mortgage owners would be better off in some cases taking a partial loss on a loan than ending up owning a foreclosed-and-at-least-temporarily-empty house — and the soon-to-be-foreclosed-on guy would be a lot better off — the Dodd plan would allow bankruptcy judges to use their keen knowledge and insight to . . .
. . . okay; maybe it’s not as good as I thought it might be.)
A tad speculative? More importantly, the initial sense that something will be done has the calming effect. What will be done has the lasting effect. It’s the latter, not the former, that we need to keep our eye on.
While Senator Dodd’s concern that the bill include help for the homeowner is very populist, it’s a related but separate issue. Something probably should be done to reform the mortgages in default, since no one can eat all these vacant foreclosed properties, and there’s no one to work with anymore to strike a deal. By conforming ridiculous interest rates to standard rates, the holders get something rather than worthless collateral. But there are a lot of ancillary questions that go along with any plan to bail out mortgage holders that don’t necessarily have any bearing on the Wall Street Bail out.
So Dodd is a sideshow, distracting attention from the main tent at the moment.
I’m always a tad speculative; that’s been kind of my job, most of my adult life.
Well, we’re agreed that Dodd is a sideshow, certainly, on that. I take the same tack on the stuff about the golden parachutes for the Wall Street guys. While there’d be something gratifying about turning some eight-figure thankyoubyes into food stamp applications, somebody who fixates on that (and Dodd, among others is doing just that) is not keeping the eye on the ball.
That said, the issue isn’t just the interest rates, but the principle, as well. Somebody who owes (to pick a number from an MPR story this morning) $200K on a house that might sell for $135K will, in lots of circumstances, end up being foreclosed on even at standard rates. (In this case, it’s almost certain; the story was about a Minneapolis woman who kept refinancing, she said, to pull money out of her appreciating house to invest in her business. Which has folded; ironically, her business was boarding up vacant houses for the city. I don’t make this stuff up, you know…)
Somebody who got one of those NINA loans and who turns out to be a bus driver making $40K/year is not going to be keeping up the payments on a $400K house except by refinancing it and ponziing the problem down the line, and that only works when property values are rising and there’s somebody who will invest in ponzi certificates, which is what a lot of those CDOs turned out to be.
(Which may, from your POV, be good for your business; some of the folks ‘way up the food chain may well end up indicted, and have enough put away to pay for the defense that they’ll definitely need. If Eliot Spitzer was still alive AG, I’m guessing a lot of them would already be in front of a Grand Jury.)
Reducing the loan amount or interest rate ends up changing the monthly nut, which is what this is all that a reasonable homeowner has a right to worry about. Conceptually, I prefer the loan amount not be changed, and that they fiddle with the rates. But then again, I also think that some homeowners cannot, and should not, be saved, and if they can’t pay off loans at prevailing rates rather than inflated rates, then they should find themselves in the same position that similarly situated people do, renting.
As for Wall Street bonuses, I see that as a substantially smaller and easier fix than home mortgage loans. And for all those who complain that topping executive compensation will cause competent executives to run like the wind, I say “pushaw”. First, if they were so competent, they wouldn’t be in this fix. Second, where are they going to go? Who want them.
“Well, Mr. Smith, you’ve run Bank of Bumpkin into the ground, and now you want to be CEO of our bank. Hmmmm.”
I think we’re going to see a lot of folks renting, what with a fairly large number of houses coming on the market at, err, fire sale prices, some people with money to invest (think “Vulture Funds”), and just about everybody thinking that they need a roof over their heads, whether or not they can (or should) be able to talk a lender into a mortgage.
At which point, I’m pretty confident, my own city council will turn up the pressure on landlords.
Thanks for reminding us of how the Patriot Act was passed. My understanding is that the administration bailout bill is about 1000 pages. If so the odds are good that there are unpleasant surprises in that bill.
When fear drives the agenda, there are always nasty surprises.
It’s amazing how little bills can be debated forever, but massive ones that can fundamentally alter the lives of Americans in a blink fly through without any depth of understanding or concern for consequences. Americans are, if nothing else, a people of action. It’s too bad we can’t be a people of thought and action.
Senate Averts Crisis, And Throws a Party!
Thanks to Mike at C